State Attorneys General Challenge SEC's Jurisdiction in Kraken Lawsuit

A collective of state attorneys general, representing Montana, Arkansas, Iowa, Mississippi, Nebraska, Ohio, South Dakota, and Texas, filed a joint amicus brief challenging the U.S. Securities and Exchange Commission's lawsuit against crypto exchange Kraken. In their filing, these state officials, alongside industry lobbyists, expressed concerns that the SEC's legal action could adversely impact consumers. They argued that the SEC was stretching the definition of an "investment contract" and emphasized that cryptocurrencies should not automatically be classified as securities.

The joint filing, echoing Kraken's and other crypto companies' perspectives, clarified that the states were opposing the SEC rather than supporting the exchange. It emphasized the states' interest in preventing potential preemption of consumer protection and other state laws by the SEC's attempt to regulate crypto assets as securities. According to the filing, the SEC's exercise of this authority not delegated to it by the states could put consumers at risk by potentially overriding state statutes more tailored to the specific risks of non-securities products.

The filing also pointed out that state cases have historically contributed to defining investment contracts and warned that an SEC victory in this lawsuit might allow the regulator to preempt state consumer protection laws and crypto regulations. The SEC initiated the lawsuit against Kraken last fall, alleging the exchange's failure to register as a securities broker, clearinghouse, or trading platform. Unlike other similar suits against companies like Coinbase and Binance, the SEC's complaint against Kraken specifically accused the exchange of promoting 11 digital assets as unregistered securities and commingling customer and corporate funds.

Kraken responded with a motion to dismiss, asserting that the SEC had failed to present plausible arguments and had exceeded its bounds, aligning with the positions taken by Coinbase and Binance. The case witnessed additional support through amicus briefs from industry groups such as the Chamber of Digital Commerce, the Blockchain Association, and the DeFi Education Fund, as well as a filing from U.S. Senator Cynthia Lummis (R-Wyo.), mirroring her office's stance in the SEC's case against Coinbase.